How Smart Beta Could Help in a Frothy Market?
Justin Kuepper
|
Let’s take a closer look at smart beta funds, strategies for frothy markets...
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Preferred stocks are callable loans to investors but have no guarantee of redemption and can literally last the entire life of the company – a feature that is helpful for a company that has issued shares with low dividend payments in a world of rising interest rates. As the interest rate increases, the price of preferred shares will decrease to make the yield more attractive to investors.
Unfortunately for bond funds, the tax code hasn’t quite closed the gap between the two types of mutual funds. Preferred stock fund payments are treated and taxed as dividends, resulting in a lower tax bill than a similar coupon payment from bond funds.
For example, the Dynamic Preferred Class Yield Fund has an MER of 1.79%, returned 7.5% in 2014, and distributes 0.36% a month. The Dynamic Corporate Bond Strategies Fund has an MER of 1.81% but had a much lower return of 3.7% in 2014 and a monthly distribution of 0.34%. Retirees can feel comfortable with a bond fund that comes with a decent monthly payment but younger investors should shy away from a bond fund that returns 4% less than a slightly riskier preferred stock fund.
But remember, in the event that a company is having financial difficulties, preferred share payments can be suspended. And in the case of liquidation, bondholders are paid ahead of the preferred shareholders.
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Justin Kuepper
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Let’s take a closer look at smart beta funds, strategies for frothy markets...
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Find out why $30 trillon is invested in mutual funds.
Download our free report
Find out why $30 trillon is invested in mutual funds.
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Preferred stocks are callable loans to investors but have no guarantee of redemption and can literally last the entire life of the company – a feature that is helpful for a company that has issued shares with low dividend payments in a world of rising interest rates. As the interest rate increases, the price of preferred shares will decrease to make the yield more attractive to investors.
Unfortunately for bond funds, the tax code hasn’t quite closed the gap between the two types of mutual funds. Preferred stock fund payments are treated and taxed as dividends, resulting in a lower tax bill than a similar coupon payment from bond funds.
For example, the Dynamic Preferred Class Yield Fund has an MER of 1.79%, returned 7.5% in 2014, and distributes 0.36% a month. The Dynamic Corporate Bond Strategies Fund has an MER of 1.81% but had a much lower return of 3.7% in 2014 and a monthly distribution of 0.34%. Retirees can feel comfortable with a bond fund that comes with a decent monthly payment but younger investors should shy away from a bond fund that returns 4% less than a slightly riskier preferred stock fund.
But remember, in the event that a company is having financial difficulties, preferred share payments can be suspended. And in the case of liquidation, bondholders are paid ahead of the preferred shareholders.
Receive email updates about best performers, news, CE accredited webcasts and more.
Justin Kuepper
|
Let’s take a closer look at smart beta funds, strategies for frothy markets...
News
Iuri Struta
|
Check out our latest edition of mutual funds scorecard.
Kristan Wojnar, RCC™
|
This week we are diving into the subjects of infographics, words that can...
Find out why $30 trillon is invested in mutual funds.
Download our free report
Find out why $30 trillon is invested in mutual funds.
Download our free report
Find out why $30 trillon is invested in mutual funds.
Mutual Fund Education
Justin Kuepper
|
Let's take a closer look at how ESG investments have outperformed during the...
Mutual Fund Education
Daniel Cross
|
While CITs and mutual funds share many similarities, there are some key differences...
Mutual Fund Education
Sam Bourgi
|
The phrase ‘bear market’ has been thrown around a lot lately, but it...